What is a land value capture tax?

The main factor that determines the price of land is the infrastructure around it - transit lines, schools, recreational centres, parks, etc. When a city decides to build or improve infrastructure, all the properties around that infrastructure gain value. This added value is what economists call a windfall gain. It’s extra wealth that landowners have gained thanks to external factors.

A land value capture tax is a mechanism by which cities can use those windfall gains to pay for the infrastructure creating the wealth gains. Instead of raising income taxes or implementing a user fee or a sales tax, cities can tax the windfall gains of land around the new infrastructure to pay for the project. While the mechanism under which this happens can change, the goal is ultimately to capture the land value gains created thanks to public investment to reinvest it back into the costs of the infrastructure that created that wealth.

This tax has been used by cities such as Portland, New York, Hong Kong and London to fund transit projects. In Canada, Metrolinx in Toronto and Translink in Vancouver have both looked into using this form of taxation to fund new transit projects.

What is the difference between the land value capture tax and existing property taxes?

Existing property taxes tax a percentage of the total value of the land and all the buildings in that land. That percentage will be the same across a given jurisdiction. So, if a property (land+building) is worth $1 million and the property tax is 2%, the landlord will be paying $2,000 regardless of where that property is located within a city

A land value capture tax, on the other hand, aims to capture the value gained by a property thanks to infrastructure built around it. Depending on how the tax is implemented by a city, the taxes paid by those properties will pay a significantly higher tax rate than a property whose value did not go up thanks to those infrastructure projects. This extra tax is used to capture gains in property value and use them to pay for the infrastructure projects.

In many ways, this creates a disincentive to speculate on the value of the land, because much of the speculative profit gained by speculators is captured by the public. This, in turn, helps keep the value of the land from rising at the levels they are rising today.

Won’t a new tax simply make housing more expensive?

If a developer or landowner could charge more for a housing unit - whether it is to rent or to sell - they would have done so already. Unlike other goods, the price of housing is not determined so much by the costs of production and maintenance, but rather by the demand of that good.

If the price of a housing unit goes up too much, people will simply not buy/rent it.

Furthermore, land value capture and windfall gains taxes reduce the incentive to speculate, which helps keep housing costs down. So, even if the developers and landowners can pass the tax down to the end consumer, the consumer is saving the cost of speculative increases in value.

If these revenue gains are used to build affordable housing units and public infrastructure in other parts of a city, that can also help stabilize prices. With higher supply of affordable housing, people will not be forced to buy or rent housing units with high speculative prices.

Why don’t we just ban foreign ownership to solve the crisis?

Foreign investment has only had a modest impact in housing prices. In fact, foreign capital has simply acted as a catalyst for financial institutions to approve larger mortgages for domestic consumption under the expectation that prices will continue to rise. This spurs domestic buyers to chase property prices that would otherwise be regarded as high-end anomalies. This, in turn, creates a self-reinforcing loop of increasingly higher real estate prices and mortgages.

Banning foreign ownership outright could cause a financial panic that can crash the market and leave thousands of British Columbians with huge mortgages on properties that have lost their value. It also denies British Columbia the inflow of foreign investment that can be used to improve the lives of residents.

The solution to the crisis is to implement policies and taxes that slow down speculation and reinvest speculative gains back into public projects like affordable housing and public infrastructure. Policies like land value capture taxes, windfall gain taxes, regulating real estate transactions and ending tax avoidance mechanisms can have a greater impact in stabilizing housing prices without leading to a financial crash.

People who can’t afford to live in expensive urban centres should just move out

Moving out of expensive urban centres is not an option for many people - or even the economy. People live in urban centres like Metro Vancouver and Victoria because that is where they can find jobs, where their families and friends live, or because that is where they find the services they need to live (transit, specialized medical services, educational institutions, etc). Instead of asking people to move further away from where they work and study - which is ultimately more expensive for individuals and society - we need to ensure there is enough housing to support people and the economy.

Furthermore, the affordability crisis extends throughout most of BC. Communities like Kelowna, Nanaimo, Penticton and Nelson also face housing shortages. In fact, we hear from members in many rural communities that they are seeing labour shortages in some of their worksites because they can’t recruit workers willing to move to a rural community where housing prices are still unaffordable.

The housing crisis is forcing many workers to leave the province altogether. BC is losing valuable productivity and economic activity due to high property prices.